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5 Overlooked Costs of Ignoring Inventory Management

iStock_000077046113 Investing in inventory management software to replace manual systems saves small businesses’ money by eliminating these little-known costs. Inventory management is not sexy, but it wasn’t a beautiful interface or a compelling marketing scheme that helped Amazon become the world’s biggest retailer. The Washington-based company went from an online bookstore to a jack-of-all-trades giant thanks to its grand vision, one aspect of which was to simply be more efficient than any other competitor. Today, Amazon ships out thousands of products a day and rakes in billions a year, in large part because they prioritize inventory management. [su_divider top="no" size="2"]

Related Article: 7 Important Inventory Metrics for Your Warehouse

[su_divider top="no" size="2"] Small and medium-sized businesses tend not to value inventory management as highly: According to the Wasp Barcode State of Small Business Report, 48 percent of businesses (with anywhere from 11-499 employees) polled didn’t track inventory or used a manual process to do so. There are several reasons why a company would fail to switch to using automated inventory management systems, including ignorance of the cost and resistance to leave behind a system that “works” for them. Basically, businesses that stick with sub-par inventory management are ignoring the long-term costs of doing so, often without realizing it. [Tweet "48 percent of businesses polled didn’t track inventory or used a manual process to do so."] An investment in software when Excel spreadsheets have performed adequately for your company over the years (or even decades) may seem like an unnecessary expense. As these costs demonstrate, companies that don’t embrace new technological solutions risk falling behind their competitors, a risky proposition when only half of new businesses survive past their first five years.

Manual Input Errors and Other Excel Limitations

Excel spreadsheets are the backbone of many companies’ inventory management, but the system has its drawbacks. Manual input of data is almost guaranteed to result in incorrect information: On average, humans make one error for every 300 characters. This leads to unnecessary re-orders of inventory which appears to be out, needed re-orders of inventory that don’t happen because records show there is still product, false information submitted for audits or for loans and other costly errors. Another major drawback is the time it takes to manually update Excel information, when automated software provides real-time updates that multiple people can alter on the fly. Excel spreadsheets also fail to track historical trends or forecast for the future, which can lead to stockouts during critical periods when demand surges. iStock_000070142999

Carrying Costs of Inventory

The costs of inventory don’t end when companies purchase the raw materials needed to make it into a final product. The so-called “carrying costs of inventory” represent as much as 25 percent of the inventory value on hand, and include ordering costs, holding costs and stock-out costs. If companies fail to account for these costs when handling their inventory (i.e., insurance on products that are damaged, or the deterioration of products that sit on the shelves for too long without being purchased), they may have to write-down their stock (a loss of market value expressed as an expense on the accounting ledger) or write it off (a complete loss of value, perhaps as a result of theft, that the company cannot recoup any of their original purchase from). Other costs to carrying inventory include capital costs, when liquid cash is tied up in product and cannot be used on other items or is lost to financing; storage space costs, which includes rent, utilities, security and upkeep in the warehouses; and service costs, such as insurance and taxes on inventory on hand.

Poor Customer Service

The inability to properly track a package from your warehouse to a customer’s doorstep leads to unhappy consumers, which can be devastating for your future business. It costs five times more to “buy” new customers than to retain existing ones, and statistics show that just a 1 percent drop in customer service issues could generate an extra $200 million in profits for a medium-sized company over five years. The best part is that inventory tracking while in transit doesn’t have to be difficult: Even behemoths like Amazon use simple technology to complete orders, as George Parker writes about the company’s success: Because of the massive volume of product it sells 24/7/365, Amazon maintains 80 enormous warehousing and fulfillment centers scattered around the known universe. These multi-football arena sized premises take care of sourcing, organizing, packing and shipping millions of orders a day… Surprisingly, they do it with a vast number of workers who use simple barcode scanners to find, and expedite on its way, any item in the warehouse…  Keeping customers happy leads to repeat business, while making them mad leads not only to their departure but the potential loss of the many people that unhappy person tells about their experience, it’s as simple as that.

Keeping Employees Happy

Asking your employees to key in hundreds of SKU numbers each day to keep track of inventory, rather than equip them with a handy wireless barcode scanner, mobile computer or even allowing them to B.Y.O.D. and use their smartphone, is a sure way to send them scrambling for a new gig. Employee turnover is bad for morale and productivity and is simply more expensive than investing in retaining current employees. It costs thousands to replace even a low-level, low-salaried employee, and even more to replace mid-range positions like managers. Improve the experience of your employees and you’ll avoid unforeseen departures that kill profits.

Collateral For a Loan and Other Value Additions

Opportunity cost is certainly overlooked by business owners who could expand their company if they had a loan. Inventory can be used as collateral for a loan, but the lender will often request an inventory valuation, which is often based on the basis of goods held in public warehouses, not on retail value. You need accurate tallies of your inventory for this, and errors that inflate the value of the company can cause legal issues that will sink your business unnecessarily. The same goes for valuing your company for a sale, or if you are gearing up to buy another company and their inventory. Small and medium-sized business owners may think they aren’t big enough to worry about inventory management. The truth is, you’re never too small to make important adjustments that can affect your bottom line in the short and long term. A proactive change now could pay massive dividends in the future, when you find you should have scaled up when implementation was easy and errors were fixable. That’s how Amazon went from big to giant, and why others are working to follow in those footsteps in our increasingly global and complex economy. How could implementing an inventory management system now help your company save money in the future?